Raghuram Rajan Talks Up India’s Economy

Raghuram Rajan at a press conference at the RBI headquarters in Mumbai, Sept. 4.

Raghuram Rajan, India’s new central bank governor, painted an optimistic picture of the Indian economy in a recent opinion column, saying that many of the country’s problems can be fixed by taking relatively easy steps.

While ambitious reform is needed to sustain growth for the next decade, “India does not need to become a manufacturing giant overnight to fix its current problems,” Mr. Rajan said in the article published by Project Syndicate, a non-profit which publishes commentary from prominent experts around the world.

The column, published Wednesday, was written before Mr. Rajan took charge at the helm of The Reserve Bank of India last week, according to a footnote on the piece.

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In the article, Mr. Rajan compared the attitude of analysts and the Indian public toward the economy to the “bipolar behavior” exhibited by fans of India’s national cricket team.

Fans “elevate players to god-like status when their team performs well, ignoring obvious weaknesses; but when it loses, as any team must, the fall is equally steep and every weakness is dissected,” Mr. Rajan said.

Similarly, he said India’s economic-watchers have gone from being over-exuberant to believing that India can do nothing right.

Mr. Rajan has already had some success in helping lift the mood of investors. Of course, easing concerns about the possibility conflict between the U.S. and Syria and good trade data have also helped. Just hours after taking charge as RBI governor, he announced steps to arrest the rupee’s slide, it fell 18% between May and August, and set out an ambitious plan to shake up the country’s conservative banking sector.

The currency has risen by more than 6% and the benchmark stock index has gained 9%, since Mr. Rajan took over as the governor at the bank.

In the Project Syndicate article, Mr. Rajan said India’s main problems–slowing economic growth and wide fiscal and current account deficits–were not, for the most part, a result of structural faults in the economy.

“They can all be fixed by means of modest reforms,” he wrote, adding that these include giving government approval for more projects, reducing poorly targeted subsidies, and finding more ways to narrow the current account deficit and ease its financing.

Mr. Rajan traced India’s current problems to two main sources–heavy government spending and easy-money policies adopted in 2008-09 to stave off a recession, and weak public institutions which couldn’t prevent corruption and graft.

The central bank had to raise rates aggressively to fight inflation fueled by the easy monetary and fiscal policies, which hurt economic growth.

On the other hand, a stream of corruption allegations against ministers and companies increased the scrutiny on Indian officials making them reluctant to clear new investment projects.

“Only now, as the government creates new institutions to accelerate decision-making and implement transparent processes, are these projects being cleared to proceed,” Mr. Rajan said in the article.

He also pointed out that India’s public finances were stronger than most emerging markets and that the country had sufficient foreign exchange reserves to fund the current account deficit for many years.

“That said, India can do better—much better,” said Mr. Rajan. “The path to a more open, competitive, efficient, and humane economy will surely be bumpy in the years to come,” he added in the article.

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